Post on 03-Nov-2019
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
Interim Financial Statements with Independent
Auditor´s Report
Terra Brasis Resseguros S.A. June 30, 2017
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
Terra Brasis Resseguros S.A.
Interim Financial Statements June 30, 2017
Contents:
Management Report ......................................................................................................................... 4
Balance sheets ................................................................................................................................... 10
Income statements ............................................................................................................................. 12
Statements of comprehensive income ........................................................................................... 13
Statements of changes in equity ..................................................................................................... 14
Statements of cash flows - indirect method .................................................................................. 15
Notes to interim financial statements ........................................................................................... 16 1. Operations .............................................................................................................................. 16 2. Preparation and presentation of interim financial statements ....................................... 16 3. Significant accounting practices ......................................................................................... 18 4. Cash and cash equivalents .................................................................................................. 22 5. Investments ............................................................................................................................ 23 6. Receivables (debts) from insurance and reinsurance operations ................................. 26 7. Tax and social security credits ............................................................................................ 28 8. Transactions with Related Parties ...................................................................................... 30 9. Third-party deposits .............................................................................................................. 30 10. Deferred taxes ........................................................................................................................ 30 11. Breakdown of adjusted equity (PLA) and capital requirement ....................................... 31 12. Technical reserves and deferred acquisition costs ......................................................... 32 13. Coverage of technical reserves ........................................................................................... 38 14. Line of Business .................................................................................................................... 38 15. Equity ....................................................................................................................................... 39 16. Risk management policy ...................................................................................................... 40 17. Breakdown of P/L accounts ................................................................................................. 44 17. Breakdown of P/L accounts (continuation) ....................................................................... 45 18. Benefícios a empregados e administradores .................................................................... 46 19. Subsequent events ................................................................................................................ 46
Summary of the Audit Committee Report .................................................................................... 48
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
Management Report
Dear shareholders,
Pursuant to the legal provision we hereby submit for your attention the financial statements of Terra Brasis Resseguros S.A. for the semester ended June 30, 2017.
The Brazilian Reinsurance Market
Based on public information of Insurance Companies (as per June 2017) disclosed by Brazil´s Private Insurance Supervisory Office (Susep), the volume of reinsurance ceded by Brazilian Insurers, gross of commission and including Policies in force but Not Issued (RVNE), reached R$ 5.4 billion in the first half of 2017, a nominal growth rate of 10% relative to the R$ 4.9 billion for the same period of 2016.
Based on the latest data on Local Reinsurers provided by Susep (for May 2017), nearly 75% of the ceded premium was placed with Local Reinsurers. However, after computing for retrocessions placed abroad, the reinsurance premium volume retained in Brazil accounts for some 45% of the total reinsurance ceded by Brazilian Insurers, while 55% is placed abroad.
Premium Distribution, January to May 2017 Allocation of premium generated in Brazil after retrocession (May 2017)
Source: Susep, Terra Brasis, amounts expressed in Reais billions. Source: Susep, Terra Brasis.
The combined post-tax profit recorded by Local Reinsurers up to May 2017 amounted R$ 398 million, compared to a R$ 338 million posted for the same period of 2016.
A number of Local Reinsurers continue on their internationalization processes, accepting risks originated abroad, notably from Latin America, reaching, from January to May 2017, R$ 1.1 billion of Written Premium, nearly 26% higher than what was obtained in the same period of 2016 and corresponding to more than 26% of the total of R$ 4.3 billion written by them.
Susep’s Circular No. 545/2017, which further clarified certain points of the Resolution No. 325/2015 of Brazil’s National Council for Private Insurance (CNSP), effective as of January 2017, confirmed the gradual return, up to the year 2020, of the main itens of the reinsurance regulation, implemented at the time of the market demonopolization, under the Supplementary Law No. 126/2007 and CNSP Resolution No. 168/2008, notably the Preferential Offer of 40%. Assuming that the practices adopted by the market in 2009 and 2010, which were the causes of the regulatory changes in 2010, will not
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
be used again, Resolution No. 325/15 will have positive effects on the market, as a stable regulatory environment allows the Brazilian reinsurance industry to focus on its improvement and development.
Corporate and Management Structure
Terra Brasis, with paid-in capital amounting to R$ 113.2 million, is part of Group Brasil Plural and has a qualified investment of the International Finance Corporation (IFC), the financial arm of the World Bank for the private sector.
In addition to its Officers and the Board of Directors, Terra Brasis has the Audit, Investment, Underwriting and Claims Committees, with statutory management support status, also approved by Susep.
The Company has its main place of business in the city of São Paulo and a commercial representation office in Bogota, Colombia.
Business Strategies and Institutional Initiatives
Since the beginning of its operations in November 2012, Terra Brasis continues with its strategy of prudent underwriting with coherent degree of risk and expected returns, thus seeking to progressively increase business volume and return on invested capital.
The Company continues to invest in the development of its professionals with a view to better serve its customers and business partners. The Company also seeks to contribute to the market improvement, by gradually introducing contemporary reinsurance techniques.
In 2017, Terra Brasis continued to offer reinsurance courses to contributors of Insurance Companies, developing studies on the impacts of natural catastrophes in Brazil, enhancing the XTerra, first non-proportional reinsurance pricing tool developed in Brazil and on January 2017 launched the 1st edition of its Terra Report LA, a periodic publication on the latin-american reinsurance market, available to all our clients, partners and colleagues.
In February 2017 Terra Brasis announced, in a partnership with AlphaCat Managers Ltd., a fully-owned subsidiary of Validus Holdings Ltd., the issuance in the international market of the first Insurance Linked Security - ILS - sponsored by a Brazilian company. This innovative deal awakes the discussion over solutions based on capital markets for the region´s exposure.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
Terra Brasis remains a member of the Inter-American Federation of Insurance Companies (FIDES), an entity formed by representatives from the insurance markets of the United States, Spain and other sixteen Latin America countries, whose objectives are to support market development, to defend the private enterprise, as well as the ethical and technical standards in all activities related to the industry. Since 2015, Terra Brasis has had representatives in the Reinsurance, Solvency, Regulation, and Financial Education Commissions of FIDES.
Terra Brasis adopts the policy of sustainability in insurance, coherent with the structure procedures of its shareholder, the International Finance Corporation (IFC) and observes on its decision making process awareness of environmental, social and governance issues. In this regard, Terra Brasis was the first Local Reinsurer to sign the Principles for Sustainable Insurance (UNEP FI), a United Nations initiative in partnership with the global insurance industry.
Performance of Operations
With the recognition and support from Insurers and Brokers in the Brazilian market, Terra Brasis’ written premium and earned premium amounted to R$ 57.2 million (41% growth in relation to the same period of 2016) and R$ 51.3 million (13% growth), respectively, in 2017 first semester. Written premium originated from abroad reached R$ 9.6 million, 17% of the company´s total written premium.
Written Premium Earned Premium
Amounts expressed in millions of reais Amounts expressed in millions of reais
After-Taxes Income Equity
Amounts expressed in millions of reais Amounts expressed in millions of reais
8,5
31,3
44,1 40,5
57,2
0
10
20
30
40
50
60
1H13 1H14 1H15 1H16 1H17
2,1
13,1
32,3
45,351,3
0
10
20
30
40
50
60
1H13 1H14 1H15 1H16 1H17
-1,2
0,9 0,9
3,7
1,9
-5,0
-2,5
0,0
2,5
5,0
7,5
10,0
1H13 1H14 1H15 1H16 1H17
97,4 97,599,7
101,1
113,2
95
100
105
110
115
1H13 1H14 1H15 1H16 1H17
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
Despite the reduction on the loss ratio, the volatility of its values and their distribution, while still reasonable given the portfolio´s size, had influence on the net retained loss ratio for the semester. In conjuction with a smaller financial result, this effect lead to a liquid result for the semester of R$ 1.9 million, inferior to the R$ 3.7 million obtained on the same period of the previous year.
The Sharehoder’s Equity of R$ 113.2 million and the Comprehensive Income Result of R$ 11.3 million were both positively influenced by adjusment of R$ 9.4 million to the value of equity shares on a privately-held entity held as investment by the Company.
Interests on Capital (“Juros sobre Capital Próprio”), amounting R$ 3.9 million, provisioned in December 2016, were paid to the shareholders on February 2017.
A.M. Best, a specialist rating agency for the insurance industry, maintained the B++ global financial strength rating and the bbb global issuer credit rating, with stable outlook. Standard & Poor’s changed the Brazilian scale rating from brA to brA+ and maintained the “stable" outlook.
Acknowledgements
We would like to thank the authorities of the sector, Insurers, Brokers, Retrocessionaires and all our business partners for their trust in the work of management. We would also like to thank our shareholders and employees for their efforts in the ongoing development of Terra Brasis.
São Paulo, August 17, 2017.
Management
KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.
KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
KPMG Auditores Independentes
Rua Arquiteto Olavo Redig de Campos, 105, 6º andar - Torre A
04711-904 - São Paulo/SP - Brasil
Caixa Postal 79518 - CEP 04707-970 - São Paulo/SP - Brasil
Telefone +55 (11) 3940-1500, Fax +55 (11) 3940-1501
www.kpmg.com.br
Independent auditors' report on the interim financial statements (A free translation of the original report in Portuguese)
To the Board Members and Shareholders of Terra Brasis Resseguros S.A. São Paulo - SP
Opinion We have audited the interim financial statements of Terra Brasis Resseguros S.A. (“the Company”), which comprise the statement of financial position as at June 30, 2017 the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the period then ended, and notes, comprising significant accounting policies and other explanatory information.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Terra Brasis Resseguros S.A. as at June 30, 2017, and of its financial performance and its cash flows for the period then ended in accordance with Accounting Practices Adopted in Brazil, applicable to entities regulated by SUSEP (Superintendência de Seguros Privados).
Basis for opinion We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Interim Financial Statements section of our report. We are independent of the Company in accordance with the relevant ethical requirements included in the Accountant Professional Code of Ethics (“Código de Ética Profissional do Contador”) and in the professional standards issued by the Brazilian Federal Accounting Council (“Conselho Federal de Contabilidade”), and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other matters - Corresponding amounts of the previous year The Company’s financial statements for the six-month period ended June 30, 2016 and for the year ended December 31, 2016, presented as corresponding amounts in the interim financial statements for the six-month period ended June 30, 2017, were audited by other independent auditors who expressed an unqualified opinion on these financial statements on August 29, 2016 and February 22, 2017, respectively.
KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.
KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
Other information accompanying the interim financial statements and the auditor's report Management is responsible for the other information comprising the management report. Our opinion on the interim financial statements does not cover the other information and we do not express any form of assurance conclusion there on.
In connection with our audit of the interim financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the interim financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information; we are required to report that fact.
Responsibility of Management and Those Charged with Governance for the Interim Financial Statements Management is responsible for the preparation and fair presentation of the interim financial statements in accordance with Brazilian accounting practices, applicable to entities regulated by SUSEP and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the interim financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s interim financial reporting process.
Auditors’ Responsibilities for the Audit of the Interim Financial Statements Our objectives are to obtain reasonable assurance about whether the interim financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and international standards on auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these interim financial statements.
As part of an audit in accordance with Brazilian and international standards on auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the interim financial statements,whether due to fraud or error, design and perform audit procedures responsive to thoserisks, and obtain audit evidence that is sufficient and appropriate to provide a basis for ouropinion. The risk of not detecting a material misstatement resulting from fraud is higherthan for one resulting from error, as fraud may involve collusion, forgery, intentionalomissions, misrepresentations, or the override of internal control.
KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.
KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
Obtain an understanding of internal control relevant to the audit in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness ofaccounting estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis ofaccounting and, based on the audit evidence obtained, whether a material uncertaintyexists related to events or conditions that may cast significant doubt on the Company’sability to continue as a going concern. If we conclude that a material uncertainty exists, weare required to draw attention in our auditors’ report to the related disclosures in theinterim financial statements or, if such disclosures are inadequate, to modify our opinion.Our conclusions are based on the audit evidence obtained up to the date of our auditors’report. However, future events or conditions may cause the Company to cease to continueas a going concern.
Evaluate the overall presentation, structure and content of the interim financial statements,including the disclosures, and whether the financial statements represent the underlyingtransactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding among other matters, theplanned scope and timing of the audit and significant audit findings, including anysignificant deficiencies in internal control that we identify during our audit.
São Paulo, 17 August 2017
KPMG Auditores IndependentesCRC 2SP014428/O-6The original report in Portuguese was signed by Luciene Teixeira MagalhãesAccountant CRC RJ-079849/O-3
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
10
Balance sheets June 30, 2017 and December 31, 2016 (In thousands of reais)
Assets Notes 06/30/2017 12/31/2016
Current assets 241.404 213.238 Cash and Cash equivalents 4 875 5.973 Cash and banks 875 5.973 Investments 5 87.867 70.188 Receivables from insurance and reinsurance operations
6 66.063 49.648
Insurance operations 62.228 44.765 Reinsurance operations 3.835 4.883 Reinsurance and retrocession receivables 12.2 78.681 81.914 Notes and credits receivables 6.125 4.172 Notes and credits receivable 159 344 Tax and social security credits 7.1 5.864 3.807 Other receivables 102 21 Prepaid expenses 129 79 Deferred acquisition costs 12.4 1.664 1.264 Reinsurance 1.664 1.264
Non-current assets 82.540 83.700 Long-term receivables 82.092 83.198 Investments 5 67.636 68.854 Reinsurance and retrocession receivables 12.2 7.662 7.764 Notes and credits receivables 6.597 6.357 Tax and social security credits 7.1 5.868 5.707 Other receivables 729 650 Deferred acquisition costs 12.4 197 223 Reinsurance 197 223 Fixed assets 225 231 Chattels 209 220 Others 16 11 Intangible assets 223 271 Others 223 271 Total assets 323.944 296.938
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
11
Liabilities and Equity Note 06/30/2017 12/31/2016
Current liabilities 197.401 180.049 Accounts payable 9.100 5.215 Liabilities 529 4.358 Taxes and social charges 248 517 Labor charges 483 263 Taxes and contributions 7.840 77 Debts from insurance and reinsurance operations 6 28.987 21.559 Reinsurance operations 27.085 20.244 Insurance and reinsurance brokers 1.902 1.315 Third-party deposits 9 1.291 1.027 Reserves - reinsurance 12.1 158.023 152.248
Noncurrent liabilities 13.392 15.008 Accounts payable 882 1.808 Deferred taxes 10 882 1.808 Reserves - reinsurance 12.1 12.510 13.200
Equity 15 113.151 101.881 Capital 100.766 100.766 Income Reserve 1.110 1.110 Securities mark-to-market 9.410 5 Retained earnings 1.865 - Total liabilities and equity 323.944 296.938
See accompanying notes.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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Income statements Semester ended June 30, 2017 and 2016 (in thousands of reais, except for earnings (loss) per share)
Notes 06/30/2017 06/30/2016
Written premium 14.1/17a 57.178 40.476
(+/-) Changes in reserves (5.914) 4.798
(=) Earned premium 14.2/17a 51.264 45.274
(-) Claims incurred 17b (21.225) (37.197)
(-) Acquisition costs 17c (1.345) (1.430)
(+/-) Other operating income (expenses) 17d (639) (15)
(-) Retrocession income (expenses) 17e (26.827) (2.209)
(-) Administrative expenses 17f (8.226) (6.389)
(-) Tax expenses 17g (1.088) (1.885)
(+) Financial income (expenses) 17h 9.016 9.553
(+) Financial income 15.030 23.360
(-) Financial expenses (6.014) (13.807)
(+) Equity pickup 17i 146 140
(=) operating income (expenses) 1.076 5.842
(-) Income tax 7.2 487 (1.159)
(-) Social contribution tax 7.2 381 (881)
(-) Profit sharing (79) (123)
(=) Net income for the semester 1.865 3.679
(/) Number of shares (thousands) 100.650 100.650
(=) Net income - per 1.000 shares 18,53 36,55
See accompanying notes.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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Statements of comprehensive income Semester ended June 30, 2017 and 2016 (In thousand of reais)
06/30/2017 06/30/2016
Net income for the semester 1.865 3.679
Other comprehensive income
Mark-to-market adjustment 17.100 (36)
Taxes on mark-to-market adjustment (deferred taxes) (7.695) 15
(=) Other comprehensive income, net of taxes 9.405 (21)
(=) Total comprehensive income for the semester 11.270 3.658
See accompanying notes.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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Statements of changes in equity Semester ended June 30, 2017 and 2016 (in thousands of reais)
Reserves
Capital Capital Income Treasury shares
Securities mark-to-market
Retained earnings/
losses Total
Balance at January 1, 2016 100.494 - - (356) 3 (2.943) 97.198
Change in mark-to-market - - - - (21) - (21)
Capital increase 272 - - - - - 272
Net income for the semester - - - - - 3.679 3.679
Balance at June 30, 2016 100.766 - - (356) (18) 736 101.128
Balance at January 1, 2017 100.766 530 580 - 5 - 101.881
Change in mark-to-market - - - - 9.405 - 9.405
Net income for the semester - - - - - 1.865 1.865
Balance at June 30, 2017 100.766 530 580 - 9.410 1.865 113.151
See accompanying notes.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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Statements of cash flows - indirect method Semester ended June 30, 2017 and 2016 (in thousand of reais)
Reclassified
06/30/2017 06/30/2016
Operating activities
Net income for the semester 1.865 3.679
Adjustments for: Depreciation and amortization 86 73
Impairment of assets 301 -
Deferred cost of acquisition (361) 160
Reinsurance and retrocession assets - technical provisions (5.138) (21.947)
Changes in reserves 27.223 32.399
Amortization of intagible assets - (21)
Changes in balance sheet accounts: Financial assets 4.346 (6.426)
Receivables from insurance and reinsurance operations (16.716) 5.602
Reinsurance assets 8.473 13.071
Tax and social security credits (2.057) 659
Deferred tax assets (240) (111)
Prepaid expenses (50) (24)
Deferred acquisition costs (12) 106
Other assets 106 -
Taxes and contributions (714) 943
Other payables (3.830) 331
Debts from insurance and reinsurance operation 7.428 (3.585)
Third-party deposits 264 158
Reserves - insurance and reinsurance operations (22.139) (24.195)
Net cash generated from operating activities (1.165)
872
Investing activities Payment for acquisition: Fixed assets (32) -
Net cash used in investing activities (32) -
Financing activities Capital increase (share subscription) - 272
Interest on equity (3.901) -
Net cash generated from/used in financing activities (3.901) 272
Net increase (decrease) in cash and cash equivalents (5.098) 1.144
Cash and cash equivalents at beginning of period 5.973 991 Cash and cash equivalents at end of period 875 2.135
See accompanying notes.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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Notes to interim financial statements (Amounts expressed in thousands of reais, unless otherwise stated)
1. Operations
Terra Brasis Resseguros S.A. (hereinafter referred to as “Terra Brasis” or “Company” or “Reinsurer”) is a privately-held corporation, with headquarters at Rua Minas da Prata, 30, suite 122 part, Itaim Bibi, São Paulo, Capital, enrolled under Brazilian IRS Registry of Legal Entities (CNPJ) No. 12.909.684/0001-28.
Terra Brasis was incorporated as of September 20, 2010 as a service provider, for the purpose of becoming a Local Reinsurer. In 2011, still in its preo-perating stage, the Company developed systems and processes to structure its reinsurance operations.
On October 4, 2012, Terra Brasis was authorized by SUSEP Administrative Ruling No. 4.881 to operate as a Local Reinsurer under the terms of article 2, item V of Brazil’s National Council for Private Insurance (CNSP) Resolution No. 168, of December 17, 2007.
The Reinsurer is a company colligated to Brasil Plural S.A Banco Múltiplo.
On November 5, 2015, by means of Administrative Ruling No. 6.381, Terra Brasis Resseguros was authorized by Brazil's Private Insurance Supervisory Office (SUSEP) to open its representative office in Colombia. On March 18, 2016, Terra Brasis Resseguros Oficina de Representacion Colombia obtained its registration with Bogota Commercial Registry Office and started operating as a representative office.
These interim financial statements were approved by the Board of Directors of Terra Brasis on August 17, 2017.
2. Preparation and presentation of interim financial statements
a) Basis of preparation: The financial statements were prepared in accordance with accounting practices adopted in Brazil applicable to institutions authorized to operate by SUSEP, which comprise the standards established by SUSEP and the accounting pronouncements issued by the Brazilian Financial Accounting Standards Board (CPC), when approved by SUSEP, and specific rules issued by Brazil’s National Board of Private Insurance (CNSP).
b) Comparability: The financial statements are presented containing comparative information for prior periods, as set forth by CPC 21 - R1- Interim Financial Statements, issued by Brazil’s FASB (CPC) and SUSEP Circular No. 517/2015.
By June 30, 2016, The Company has re-classified deferred acquisition costs, reinsurance and retrocession receivables and reserves changes, previously disclosed as changes in balance sheet accounts, as adjustments to net profit. Such reclassification were made in order to better disclose the company´s financial statements and have not had any impact on the cash flow generated by the semester´s operating activities.
c) Continuity: Management assessed Terra Brasis’ ability to continue as a going concern and is satisfied that the Company has sufficient funds to continue in business. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going concern.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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d) Functional and reporting currency: The interim financial statements are presented in Brazilians Reais (R$), which is the Company’s functional currency. The amounts are stated in thousands of reais (R$000) and rounded to the nearest thousand, unless otherwise stated. Transactions in foreign currencies are recorded at the functional currency rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency using the rate of exchange prevailing at that date. Foreign currency fluctuations arising from this translation are posted in the income statement.
e) Basis of measurement: The assets and liabilities are measured in accordance with the historical cost, except for significant items in balance sheets:
i. financial assets measured at fair value through profit or loss;
ii. financial assets available for sale measured at fair value; and
iii. reserves measured according to SUSEP guidelines.
f) Use of estimates and judgments: Preparation of financial statements in accordance with the standards published by SUSEP requires management to record certain amounts of assets, liabilities, revenues, and expenses based on estimates, which are established based on judgments and assumptions as to future events. The actual amounts for which operations are settled may differ from these estimates due to the subjectivity inherent in the determination process.
Accounting estimates and assumptions are reviewed from time to time. Reviews with respect to accounting estimates are recognized in the period the estimates are reviewed and in any future periods affected.
Information on areas where the use of assumptions and estimates is significant for the financial statements and in which, therefore, there is a significant risk of material adjustment in the next fiscal year, is included in the following notes
Note 3.2 - Financial Instruments;
Note 3.3 - Written Premium;
Note 3.9 - Technical provisions and liability adequacy test;
Note 6 - Receivables (debt) from insurance and reinsurance operations;
g) Segregation between current and non-current: Terra Brasis classified its assets as current when the following criteria are met:
When these are expected to be realized in the normal operating cycle (12 months) of the Company; or
When these are held primarily for the purpose of being traded.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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3. Significant accounting practices
The main accounting practices used to prepare these financial statements have been consistently applied to all comparative periods presented, and are detailed below.
3.1. Insurance contracts: The main definitions of the characteristics of an insurance contract are described in CPC 11 - Insurance Contracts. Additionally, SUSEP Circular No. 517/2015 has established criteria for the identification of an insurance contract.
3.2. Financial instruments: The Company classifies its financial assets into the following categories: (i) financial assets measured at fair value through profit or loss, (ii) financial assets held to maturity (iii) financial assets available for sale and (iv) receivables. Classification into these categories is determined by Management upon initial recognition and depends on the strategic purpose for which the asset has been acquired.
3.2.a. Classification into categories:
i. Financial assets measured at fair value through profit or loss
Financial assets are classified at fair value through profit or loss if they are classified as held for trading and designated for such purpose upon initial recognition. The Company manages these investments and makes buying and selling decisions based on fair values according to risk management and investment strategy. These assets are measured at fair value, and changes in fair value of these assets are recognized in profit or loss for the year.
ii. Financial assets held to maturity
These are classified into this category if management intends and is able to hold these financial assets to maturity. Investments held to maturity are recorded at amortized cost less any impairment loss.
iii. Financial assets vailable for sale
These financial assets are not classified into any of the abovementioned definitions. After initial recognition, these are measured at fair value and changes, other than impairment losses, are recognized in other comprehensive income (loss) and presented within equity. When an investment is written off, the accumulated gain (loss) recorded in other comprehensive income (loss) is transferred to P&L.
iv. Loans and Receivables
These consist, substantially, of receivables under reinsurance contracts that are periodically tested for impairment. If objective evidence indicates that an impairment loss has occurred, this loss is recognized in P&L for the year
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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3.2.b. Determination of fair value: Fair values are estimated for measurement and/or disclosure purposes. When applicable, additional information on the assumptions used in estimating fair values are disclosed in the accompanying notes.
3.2.c. Fair value hierarchy:
The hierarchy related to fair value measurement is broken down into the following levels:
Level 1: Quoted (unadjusted) market prices in active markets for identical assets;
Level 2: Classified when a discounted cash flow methodology or another asset pricing methodology based on market data is used and when all this data is observable in the open market;
Level 3: Asset not based on observable market data and the Company uses internal assumptions for determination of its methodology and classification.
3.3. Written premium: Terra Brasis issued reinsurance contracts to provide cover to risks ceded by Insurance and Reinsurance companies (Ceding companies).
Facultative reinsurance contracts are those in which the risk specifically assumed is ceded individually by and at the option of the Ceding companies, whereas Automatic or Portfolio reinsurance contracts are those whereby the Ceding company and Terra Brasis define in advance the coverage types and conditions under which the risks will be automatically included within their terms.
Contracts may be under Proportional Reinsurance system, when the claims and the original premiums are divided up proportionally between Terra Brasis and the Ceding company, or as Non-Proportional Reinsurance, also known as Excess of Loss Reinsurance, when Terra Brasis indemnifies the Ceding company only against the amount of loss in excess of a specified retention and receives a reinsurance premium from the Ceding company, calculated specifically for such liability.
Policies in Force but Not Issued (RVNE) were calculated based on percentages established in CNSP standards, regulated by SUSEP.
Under Facultative Reinsurance Contracts, reinsurance premiums are fully recognized as of the writing date of the Contracts.
Under Non-Proportional Automatic Reinsurance Contracts, reinsurance premiums are also fully accounted for as of the date on which the contracts are written, based on the Premium Deposit, and are monitored over the life of the contract and adjusted upon their effective value at their termination.
In the case of Proportional Automatic Reinsurance Contracts, reinsurance premiums are recorded monthly, based on estimates provided by the Ceding Company and underwritten by Terra Brasis, so as to monitor the premiums written by the Ceding Company over time and in terms of value. Initially the estimates are adjusted by a cut-off factor measured based on the Company’s historical experience. The estimates are monitored over the life of the contract and adjusted when updated information is received from the Ceding Company.
Terra Brasis enters into Retrocession Agreements to increase its acceptance capacity, to cap its responsibility to its risk retention limit, and to mitigate the risk of significant losses from catastrophic events.
Premiums ceded under Proportional Retrocession Agreements are recorded in consonance with the recording of acceptance premiums covered thereunder. Premiums under Non-Proportional Retrocession Agreements are fully recorded as of the date the Retrocession Agreement is ceded.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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Reinsurance premium arising from automatic contracts are measured considering the Estimated Premium Income - EPI - for the contract´s term adjusted by a threshold that seeks to reflect the historical experience observed by the evaluation between estimated premium and those effectively written by the ceding companies. Based on periodic evaluation, the threshold applied on contracts issued by June 2017 was reduced from 20% to 10%.
For automatic contracts signed with cedents based abroad, this threshold is not applied as EPI and effective premium are very close to eachother.
Acquisition costs are recorded under the same criteria used for premiums.
3.4. Impairment: In conformity with article 167 of SUSEP Circular No. 517/2015, Terra Brasis completed a specific technical study of its loss history and default risk. The study considers the particular nature of the operation and the rendering of accounts in the reinsurance market, in addition to the quality of debtors and the fact that the default level is nil. Late payments are reviewed on an individual basis by the Executive Board. Based on that study, an asset may be classified as non-recoverable at any time after a justified case of default, or within a maximum three hundred and sixty (360) days, counting from the right of receipt.
3.5. Fixed assets: Fixed assets for own use consist of furniture and fixtures and equipment used in the ordinary course of business and are stated at historical cost. The cost of fixed assets is stated less accumulated depreciation.
3.6. Intangible assets: Costs associated with acquisition of software are recorded as assets and amortized over their useful life, not to exceed five years. In-house software is recognized as expenses for the period.
3.7. Earned premium: Under Facultative Contracts, premiums and the corresponding acquisition costs are allocated to P&L on a daily pro rata basis, while the policies are in force.
Under Proportional and Non-Proportional Automatic Risk Attaching Contracts (in which the risks underwritten over the life of contract remain covered during their full term), premiums and the corresponding acquisition costs are allocated to P&L on a daily pro rata basis while the policies remain in force, according to information and estimates regarding average effective terms provided by the Ceding companies.
Under Non-Proportional Automatic Loss Occurring Contracts (in which losses occurring over the life of the contract are covered), premiums and the corresponding acquisition costs are allocated to P&L on a daily pro rata basis while the contracts remain in force.
For Retrocession Agreements, the same allocation principles apply to the retrocession ceded.
3.8. Claims incurred: Correspond to the sum of claims paid and variation in the claims reserve (PSL), for claims incurred but not reported (IBNR) and claims incurred but not enough reported (IBNER).
3.9. Technical provisions and liability adequacy tests: Reserves are recorded in accordance with the provisions and criteria established by the CNSP and SUSEP
The Unearned Premium Reserve (PPNG) consists of the proportional part of reinsurance premiums in force, calculated on a daily pro rata basis, corresponding to the risk coverage not yet expired, which is determined for each type of contract based on information or estimates, adopting the same criteria used to allocate premiums to P&L.
The PPNG-RVNE is recorded to determine the portion of unearned premium related to reinsurance contracts not issued in accordance with the criteria established in the Technical Actuarial Note, SUSEP Circular No. 517/2015, and subsequent amendments thereto.
The Surplus Reserve (PET) is set up according to the criteria established in specific reinsurance contract clauses determining that Ceding Companies have their share in the contract revenue.
The Outstanding Claims Reserve (PSL) is set up to cover estimated probable payments determined based on events reported up to the balance sheet date.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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The Reserve for Claims Incurred But Not Reported (IBNR) is set up in accordance with actuarial calculations that consider the estimated final loss less claims already reported up to the balance sheet date.
Provision for related expenses (PDR-IBNR) is set up at the amounts of expected expenses related to claims occurred but not yet reported.
Retrocession liabilities consist of premiums payable, consistently measured with the amount of reinsurance assets to the extent these are retroceded.
According to CPC 11, issued by the Brazilian FASB (CPC), at each balance sheet date, the Liability Adequacy Test (LAT) shall be prepared for all contracts in force on the date the test is conducted. The test is prepared considering as book value all insurance contract liabilities less DACs and intangible assets directly related thereto.
The Liability Adequacy Test (LAT) was prepared in accordance with SUSEP Circular No. 517/2015 and included the effective reinsurance contracts at June 30, 2017. The result of this test is the difference between the book value of the technical provisions and the amount of future cash flow estimates of liabilities related to risks, both at base date. The negative result obtained indicated the insufficiency of the technical provisions, which should be set up as supplementary coverage provision (PCC) for claims to be incurred, or supplement the balance of the insufficient provision, in case of claims incurred.
Cash flows were discounted to present value based on the Term Structure of Interest Rate (ETTJ) free of risks, as defined by SUSEP for each contractual index.
The LAT result showed that current reserves are sufficient to cover all liabilities related to contracts in force as of June 30, 2017. Therefore, there is no need to set up a Supplementary Reserve Coverage (PCC), referring to insufficient PPNG, if any, or to supplement balance in other reserves.
3.10. Deferred acquisition costs: Acquisition costs are recognized upon contract acceptance and allocated to P&L over the coverage period. These commissions are deferred using the same deferral approach adopted for premiums.
3.11. Income and social contribution taxes: Income tax is calculated at a rate of 15%, plus a 10% surtax on taxable profit exceeding R$ 240 thousand over 12 months. Law No. 13.169/2015, then Executive Order (MP) No. 675 of 2015, increased the tax rate of Social Contribution Tax on Net Profit (CSLL) to 20% from September 1, 2015 to December 31, 2018. The Company applied the 5% CSLL rate increase to its tax credits on temporary differences, deferred taxes and CSLL tax losses.
Income and social contribution tax expenses comprise current and deferred taxes. Current and deferred taxes are recognized in the income statement unless they are related to items recognized directly in equity or in other comprehensive income.
Tax credits and income tax liabilities and social contribution arising from fiscal losses, social contribution negative basis, and temporary differences between the accounting recognition bases and tax bases are accounting recongnized. A provision for active tax credits is constituted in case tax losses are computed in, at least, 3 from the last 5 social years or whenever there is no expectation for future taxable profits generation sufficient for using the tax credit.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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Assets from income tax and deferred social contribution are monthly reviewed and will be de-recognized as its realization is no longer probable.
3.12. Contribution Taxes on Gross Revenue for Social Integration Program (PIS) and for Social Security Financing (COFINS): The Contribution Taxes on Gross Revenue for Social Integration Program (PIS) and for Social Security Financing (COFINS) are accrued at the rates of 0.65% and 4%, respectively, pursuant to current legislation.
The Reinsurer recognizes on balance, since 2016 2nd half, PIS and COFINS tax credits arising from losses reserves, deducted reserves for losses recoveries. For computing the calculation basis of such contributions, these values are deducted only when paid or received.
4. Cash and cash equivalents
06/30/2017 12/31/2016
Cash 6 9
Banks 869 5.964
Checking account 284 111
Checking account in foreign currency (CCME) 585 5.853
Total 875 5.973
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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5. Investments
5.1. Breakdown of investments: All investment funds that Terra Brasis invests its resources are non-exclusive and their data are made available, open to other investors (including SUSEP´s non supervised entitities) and are non-maturity date.
Contract interest rates / 06/30/2017 12/31/2016
Rating (*) ANBIMA Classification Valor % Valor % Financial securities Available for sale 125.341 80 110.417 79
Government Securities - National Treasury Bills - LFT
19.397 12 19.511 14
AAA 100,1% Selic 19.397 12 19.511 14 Non-government securities - Financial Notes
26.126 17 28.968 20
AAA 100,4% to 112,4% CDI 20.968 14 18.624 13
AA- a AA+ 112,0% to 113,3% CDI 5.158 3 - -
BBB+ 120,0% CDI - 10.344 7 Non-government securities -
Debentures 53.769 34 52.558 38
AAA 105,2% to 111,5% CDI / CDI+1,85% 7.472 5 13.665 10
A a A+ CDI+1,07% / 118% CDI 4.876 3 4.915 4
AA- a AA+
CDI+1,0% to +2,5%/108,5% to 118% CDI
40.857 26 31.654 22
AA- a AA+ IPCA+7,57% to 9,0% 564 - 2.324 2
Equity Shares - privately-held entity
A-
26.049 17
9.380 7
Securities measured at fair value through profit or loss
30.162 20 28.625 21
Open-end investment fund shares
30.162 20 28.625 21
Equity Ibovespa Ativo - 7.734 6
Fixed income 6.634 4 845 1
Multi-markets Multi-strategy 11.854 8 11.273 8
Foreign Exchange 11.674 8 8.773 6
Total 155.503 100 139.042 100
(*) Standard & Poor’s, Moody’s, Fitch and A.M.Best ratings are considered. If different credit ratings have been assigned to the same asset, the higher rating is used.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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5.2. Breakdown by maturity
06/30/2017 12/31/2016
No maturity No maturity
or before 1
year From 1 to
5 years Total %
or before 1 year
From 1 to 5 years
Total %
Open-end investment
fund shares 30.162 - 30.162 19 28.625 - 28.625 21
Equity Shares 26.049 - 26.049 17 9.380 - 9.380 7
Government Securities - 19.397 19.397 12 5.276 14.235 19.511 14 LFT - 19.397 19.397 12 5.276 14.235 19.511 14
Non-Government Securities 31.656 48.239 79.895 52 26.907 54.619 81.526 58 Debentures 12.551 41.218 53.769 35 5.060 47.498 52.558 37 Financial Notes 19.105 7.021 26.126 17 21.847 7.121 28.968 21
Total 87.867 67.636 155.503 100 70.188 68.854 139.042 100
5.3. Financial assets marked to market
06/30/2017 12/31/2016
Restated
cost
Fair value
adjustment
Fair / book value
Restated cost
Fair value
adjustment
Fair / book value
Financial securities available for sale 108.232 17.109 125.341 110.408 9 110.417 Government Securities - National Treasury Bills (LFT)
19.397 - 19.397
19.511 - 19.511
Non-Government Securities - Financial notes 26.106 20 26.126 28.910 58 28.968
Non-Government Securities - Debentures 53.349 420 53.769 52.607 (49) 52.558
Equity Shares - Privately-held entity 9.380 16.669 26.049 9.380 - 9.380 Securities measured at fair value through profit or loss
30.162 - 30.162
28.625 - 28.625
Open-end investment fund shares 30.162 - 30.162 28.625 - 28.625
Total 138.394 17.109 155.503 139.033 9 139.042
5.4. Hierarchy of fair value of short-term investments
06/30/2017 12/31/2016
Level1 Level2 Level3 Level1 Level2 Level3
Government Securities - National Treasury Bills (LFT)
19.397 - -
19.511 - -
Non-Government Securities - Financial notes
- 26.126 -
- 28.968 -
Non-Government Securities - Debentures - 53.769 - - 52.558 -
Open-end investment fund shares - 30.162 - - 28.625 -
Equity Shares - Privately-held entity - - 26.049 - - 9.380
Total 19.397 110.057 26.049 19.511 110.151 9.380
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
25
The fair value of financial investment funds was estimated as the equity value disclosed by the managers of the investment funds, in which Terra Brasis invests. The financial instruments are booked in the investment fund’s portfolio. The investment funds are classified as Level 2 and may use derivatives in their investment strategy (see note 3.2.c). Closed capital companies shares fair value was determined based on technical studies made by the Board (see note 19).
5.5. Derivatives
The company operates directly with derivative instruments, specifically [B3] dealt contracts, aiming at covering itself from negative impacts from its US dollar liabilities that may arise due to F/X fluctuation. Terra Brasis´s exposure in US dollars are mentioned at Note 16.5.
Here follows Terra Brasis position in future contracts:
Derivatives Maturing date Amount Fair value(*) Receivable / (payable)
Future USD 1st August 2017 15 2.495 -
2.495 -
(*) Fair value is based in information from [B3] daily dealt contracts.
By December 31, 2016 the Company had any derivatives by it managed.
5.6. Changes in investments
01/01/2017 01/01/2016
to 06/30/2017 to 06/30/2016
Opening balance 139.042 131.439
Investments 138.047 83.969
Redemptions (146.521) (83.202)
Interest 7.864 5.623
Mark-to-market adjustment 17.071 36
Closing balance 155.503 137.865
5.7 Performance: Management measures investment profitability based on Interbank Deposit Certificate (CDI) yield rate variation. Management also measures investment profitability by excluding investments in foreign exchange funds, used to hedge financial liabilities in foreign currency.
Profitability (%) CDI (%) Profitability - CDI (%)
Year Full
portfolio
Excluding foreign
exchange funds CDI Full
portfolio
Excluding foreign
exchange funds Full
portfolio
Excluding foreign
exchange funds
2017* 6,26 6,44 5,61 110 113 0,65 0,83
2016 11,08 14,17 14,06 79 101 (2,98) 0,11
2015 15,77 14,23 13,23 119 108 2,54 1,00
2014 11,78 11,46 10,81 109 106 0,97 0,65
2013 8,44 8,46 8,06 105 105 0,38 0,40
* Corresponds to the period of January to June 2017.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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6. Receivables (debts) from insurance and reinsurance operations
6.1. Breakdown
Operation receivables Operation payables
Line 06/30/2017 12/31/2016 06/30/2017 12/31/2016
Property 23.730 21.465 13.085 12.061
Special risks 63 91 1 8
Civil liability 2.384 1.757 505 455
Automobile 1.256 167 3 (33)
Transport 11.214 5.669 5.488 1.839
Financial risks 9.853 8.279 7.058 5.826
Life 585 1.063 200 156
Homeowners 54 52 255 246
Crop 1.009 852 103 50
Other (*) 13.875 7.343 1538 461
Marine 1.265 2.045 479 146
Aviation 775 865 272 344
Total 66.063 49.648 28.987 21.559
(*) These fully refer to risks accepted from abroad, line of business 1279 - Foreign Insurance.
6.1.a. Changes in receivables from insurance and reinsurance operations
01/01/2017 a
06/30/2017 01/01/2016 a
06/30/2016
Opening balance 49.648 50.535
Written premium 55.729 41.914
RVNE 1.449 (1.438)
Premium collected (38.903) (45.479)
Foreign Exchange variation 330 (872)
Claims recovered (1.889) 273
Impairment (301) -
Saldo Final 66.063 44.933
6.1.b. Changes in debts from insurance and reinsurance operations
01/01/2017 a
06/30/2017
01/01/2016 a
06/30/2016
Opening balance 21.559 27.090
Written retrocession premium 31.929 25.115
RVNE 28 (1.330)
Brokerage 587 86
Payments (25.184) (27.321)
Foreign Exchange variation 68 (135)
Saldo Final 28.987 23.505
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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6.2. Realization flow of receivables and payables
6.2.a. Prazos de recebimento de créditos das operações com resseguro e retrocessão:
06/30/2017 12/31/2016
Falling due Overdue Total Falling due Overdue Total
No maturity(*) 28.869 - 28.869 16.533 - 16.533
1 to 30 days 17.560 2.413 19.973 19.328 3.520 22.848
31 to 60 days 3.514 155 3.669 1.967 767 2.734
61 to 120 days 4.042 1.136 5.178 2.181 352 2.533
121 to 180 days 2.055 936 2.991 1.774 737 2.511
181 to 365 days 4.939 1.357 6.296 2.976 125 3.101
Impairment - (913) (913) (612) - (612)
Total 60.979 5.084 66.063 44.147 5.501 49.648
(*) Amounts recognized based on information provided by the ceding companies, and financially settled at varying maturity dates. The amounts presented under the “Overdue” column are those under discussion or awaiting further clarification or additional documents, and do not refer to events of default.
6.2.b. Payment turnover:
06/30/2017 12/31/2016 Falling due Overdue Total Falling due Overdue Total
No maturity(*) 12.420 - 12.420 6.387 - 6.387
1 to 30 days 9.025 550 9.575 7.446 235 7.681
31 to 60 days 2.090 16 2.106 2.537 54 2.591
61 to 120 days 2.078 399 2.477 756 1.714 2.470
121 to 180 days 1.200 25 1.225 256 29 285
181 to 365 days 1.114 70 1.184 828 1.317 2.145
Total 27.927 1.060 28.987 18.210 3.349 21.559
(*) Amounts recognized based on information provided, and financially settled at varying maturity dates. The amounts presented under the “Overdue” column are those under discussion or awaiting further clarification or additional documents, and do not refer to events of default.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
28
7. Tax and social security credits
7.1.a. Tax Credits
12/31/2016 Recognition Elimination
Update 06/30/2017
Current assets 3.807 2.240 (339) 156 5.864 Prepaid income tax 1.017 1.004 (339) 62 1.744
Prepaid social contribution tax 657 811 - 67 1.535
PIS and COFINS credits 138 194 - 27 359
Deferred PIS and COFINS 1.995 231 - - 2.226
Non-current assets 5.707 293 (132) - 5.868
Tax credit on income tax losses 2.880 - (60) - 2.820
Tax credit on temporary adjustments 278 163 (1) - 440
Tax credit on social contribution tax losses 2.304 - (48) - 2.256
Social contribution credit on temporary adjustments 223 130 (1) - 352
IR and CS - mark-to-market adjustment (TVM) 22 - (22) - -
Total 9.514 2.533 (471) 156 11.732
7.1.b. Recording and offset of deferred income and social contribution tax credits
Recognition and offset
of tax credits Year of
accrual / offset
Tax base IRPJ
CSLL
Total
Prior to 2015 6.526 1.163 1.939 3.102
2015 4.568 1.018 874 1.892
2016 426 123 67 190
2017 (240) (48) (60) (108)
Total 11.280 2.256 2.820 5.076
The credits were posted to assets based on projections of future taxable income, and the Company estimates that these credits will be realized until 2020.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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7.2. Income and social contribution tax expenses
06/30/2017 06/30/2016
Income tax
Social contribution
tax Income
tax Social
contribution tax
Income / (loss) before taxes, interest on equity and profit sharing 1.076 1.076 5.842 5.842
Profit sharing (79) (79) (123) (123) Adjusted income 997 997 5.719 5.719
Permanent additions/exclusions (i) (1.101) (1.101) 104 104 Temporary additions / exclusions ((ii) 716 716 (1.728) (1.728)
(=) Profit before tax offset 612 612 4.095 4.095
Offsetting of income and social contribution tax losses (184) (184) (1.229) (1.229) (=) Profit after tax offset 428 428 2.866 2.866
Taxes calculated at nominal rates 134 112 705 573 Tax benefits deductions (PAT, “Lei Rouanet” and “Empresa Cidadã”) (5) - (18) -
Deferred IRPJ/CSLL 616 493 472 308 Offsetting of income and social contribution tax losses (60) (48) 307 246 Recognition of tax credits and temporary adjustments 162 129 165 62 Tax liability (iii) 514 412 - -
(=) Total IR and CS (487) (381) 1.159 881
Effective rate -45% -35% 20% 15%
(i) In 2017 it refers to received dividends.
(ii) These refer mainly to foreign exchange gains (exclusions) and foreign exchange losses (additions). Which are taxable or deductable when effectivelly received or paid.
(iii) Reversion of tax credits from PIS and COFINS, considered as exclusion on the second semester of 2016.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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8. Transactions with Related Parties
8.1. Terra Brasis invests in open-end funds managed by Brasil Plural Gestão de Recursos Ltda., an entity related to the controlling shareholders. The investments of Terra Brasis are not material in relation to the funds’ assets.
8.2. Global key management compensation for the semester amounted to R$ 1.428 (R$ 1.225 in 2016) which substantially corresponds management fees.
9. Third-party deposits
06/30/2017 12/31/2016
From 1 to 30 days 906 470 From 31 to 60 days 84 401 From 61 to 120 days 32 89 From 121 to 180 days 143 10 From 181 to 365 days 126 57
Total 1.291 1.027
10. Deferred taxes
This refers to income and social contribution taxes payable on revenue recognized on foreign exchange variation, on-balance accounted, registered, whose fiscal treatment was considered as temporary, raising a deferred tax liability. Its realization takes place at the liabilities settlement moment in future events.
10.1 Deferred taxes adjustments
12/31/2016 Reversion Adjustment(*) 06/30/2017
Deferred income tax 1.004 (16) (499) 489 Deferred social contribution 804 (12) (399) 393
1.808 (28) (898) 882
(*) Refers to time adjustment over the amount of PIS and COFINS deferred over PSL and that were considered at 2016´s exercise as temporary exclusions at the calculation base for income tax and social contribution.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
31
11. Breakdown of adjusted equity (PLA) and capital requirement
06/30/2017 12/31/2016
Equity 113.151 101.881
Prepaid expenses not related to reinsurance (129) (79)
Tax credits (5.076) (5.184)
Intangible assets (223) (271)
a. Adjusted equity (PLA) 107.723 96.347
b. Base capital 60.000 60.000
c. Risk capital 27.484 25.940
Underwriting risk-based capital 12.714 11.707
Credit risk-based capital 15.664 15.020
Market risk-based capital (*) 5.617 5.331
Diversification benefit (7.210) (6.797)
Operational risk-based capital 699 679
d. Capital requirement (max[b,c]) 60.000 60.000
e. Capital sufficiency (a - d) 47.723 36.347
Capital sufficiency (d/e) 80% 61%
(*) Pursuant to CNSP Resolution No. 321/2015, the Risk Capital amount based on market risk effectively required corresponds to 50% of the amount computed for the period ended June 30, 2017. The total of such amount shall be considered as from December 31, 2017.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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12. Technical reserves and deferred acquisition costs
12.1 Reinsurance and retrocessions accepted
06/30/2017
Unearned Premium Reserve
Claims reserve Other
reserves
Line Accepted RVNE Commission
IBNR Reported PET
PDR-IBNR Total
Property 20.587 5.366 (3.216) - 62.916 218 - 85.871 Special risks 101 29 (6) 297 635 - 12 1.068 Civil liability 2.177 579 (282) - 9.930 51 - 12.455 Automobile 1.149 254 (325) 270 313 - 2 1.663 Transport 7.900 2.041 (1.288) 3.745 8.047 74 2 20.521 Financial risks 24.026 4.521 (9.377) 4.098 3.651 584 27 27.530 Life 227 70 - - 487 280 - 1.064 Homeowners 15 2 (7) 76 82 6 - 174 Crop 631 149 (148) 125 332 54 1 1.144 Other 9.226 2.078 (2.494) - 4.256 264 - 13.330 Marine 1.776 548 - 949 1.075 45 18 4.411
Aviation 676 202 (23) 4 411 32 - 1.302
Total 68.491 15.839 (17.166) 9.564 92.135 1.608 62 170.533
12/31/2016 Unearned Premium Reserve
Claims reserve
Other
reserves
Line Accepted RVNE Commission IBNR Reported PET
PDR-IBNR Total
Property 21.448 5.662 (3.102) - 61.689 209 - 85.906 Special risks 159 46 (9) 2.391 625 - 16 3.228 Civil liability 1.871 511 (213) 4.021 8.519 64 27 14.800 Automobile 138 31 (39) 319 257 4 2 712 Transport 5.918 1.656 (552) 4.576 6.851 96 30 18.575 Financial risks 21.311 4.006 (8.332) 3.166 2.314 446 21 22.932 Life 653 202 - 131 197 288 1 1.472 Homeowners 5 1 (2) 68 57 63 - 192 Crop 127 34 (18) - 363 60 - 566 Other 5.843 1.312 (1.592) 311 1.900 130 2 7.906 Marine 2.388 736 (5) 3.358 1.303 34 22 7.836
Aviation 681 193 (50) 226 236 36 2 1.323
Total 60.542 14.390 (13.914) 18.567 84.311 1.430 123 165.448
Note: RVNE: Policies in force but not issued; Commission: Commission to ceding company; IBNR: Incurred But Not Reported; IBNER: Incurred But Not Enough Reported; PET: Reserve for Technical Surplus; PDR-IBNR: IBNR Loss Expense Reserve.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
33
12.2 Retrocessions ceded
Unearned Premium Reserve
Claims reserve
Other reserves
06/30/2017
Line Ceded RVNE Commission IBNR Reported PET Total
Property 11.075 2.157 (1.776) - 35.578 101 47.135 Special risks - - - 166 542 - 708 Civil liability 398 118 (45) - 6.335 - 6.806 Automobile - - - 70 8 - 78 Transport 4.253 1.061 (1.070) 2.439 4.878 - 11.561 Financial risks 19.762 3.713 (8.715) 2.835 745 179 18.518 Life 67 - - - 9 134 210 Homeowners 1 1 - 22 28 (18) 34 Crop 59 15 (16) 52 76 - 186 Other 524 152 (119) - 6 - 564 Marine 256 78 (52) 18 - - 300 Aviation 187 34 (10) 1 31 - 243
Total 36.582 7.329 (11.803) 5.603 48.236 396 86.343
Unearned Premium Reserve
Claims reserve
12/30/2016 Other
reserves Line Ceded RVNE Comission IBNR Reported PET Total
Property 10.655 2.883 (1.987) - 39.896 96 51.543 Special risks 19 4 (6) 1.304 534 - 1.855 Civil liability 693 184 (48) 1.834 6.097 - 8.760 Automobile - - - 105 8 - 113 Transport 2.905 886 (244) 2.987 4.737 - 11.271 Financial risks 17.340 3.231 (7.586) 2.087 75 110 15.257 Life - - - 88 - 133 221 Homeowners 1 - - 21 12 - 34 Crop 4 2 - - 46 - 52 Other 197 45 (62) 4 - 1 185 Marine - - - 39 - - 39
Aviation 201 66 (23) 76 28 - 348
Total 32.015 7.301 (9.956) 8.545 51.433 340 89.678
Note: RVNE: Policies in force but not issued; Commission: Commission to ceding company; IBNR: Incurred But Not Reported; IBNER: Incurred But Not Enough Reported; PET: Reserve for Technical Surplus; PDR-IBNR: IBNR Loss Expense Reserve.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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12.3 Changes in reserves
PPNG - Accepted PPNG RVNE
Other reserves PET/PDR
Total Premium Reserves
Balance at January 1, 2017 46.628 14.390 1.553 62.571
Written premium for the period 55.729 1.449 - 57.178
Earned premium for the period (51.264) - - (51.264)
PET - - 117 117
Change in estimate 232 - - 232
Balance at June 30, 2017 51.325 15.839 1.670 68.834
PSL - Accepted IBNR
PDR-IBNR PSL
Total claims reserves
Balance at January 1, 2017 18.567 123 84.311 103.001
Change in estimate (9.003) (61) - (9.064)
FX fluctuation - - 427 427
Change in claims reported - - 30.288 30.288
Claims paid for the period - - (22.891) (22.891)
Balance at June 30, 2017 9.564 62 92.135 101.761
PPNG - Ceded PPNG RVNE
Other reserves
Total premium reserves
Balance at January 1, 2017 22.059 7.301 340 29.700
Written premium for the period 32.462 28 - 32.490
Earned premium for the period (29.141) (28) - (29.169)
PET - - 55 55
Change in estimate (601) 28 1 (572)
Balance at June 30, 2017 24.779 7.329 396 32.504
PSL - Ceded IBNR PSL
Total Claims Reserve
Balance at January 1, 2017 8.545 51.433 59.978
Change in estimate (2.942) - (2.942)
FX fluctuation - 239 239
Change in claims reported - 5.235 5.235
Claims recovered for the period - (8.671) (8.671)
Balance at June 30, 2017 5.603 48.236 53.839
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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12.4 Deferred Acquisition costs
01/01/2017 a 06/30/2017
Brokerage Opening Recognition Deferral F/X Closing
Line Balance Fluctuation Balance Property 684 670 (606) - 748 Special risks 7 - (4) - 3 Civil liability 87 134 (89) - 132 Automobile 4 44 (12) - 36 Transport 144 207 (121) 3 233 Financial risks 61 84 (47) - 98 Group life 35 - (22) - 13 Rural 4 7 (3) - 8 Other 161 415 (238) 7 345 Maritime 247 127 (170) 1 205 Aviation 53 19 (33) 1 40
Total 1.487 1.707 (1.345) 12 1.861
For the current business portfolio, the initial average deferrement term for treaties is 24 months and 12 months for facultative businesses.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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12.5 Progress of claims
12.5.a. Table of progress of claims to be settled - Gross of retrocession
The claims development table illustrates the development in terms of claims reports received by Terra Brasis for each underwriting year. From the year in which the reinsurance contract was underwritten, the upper portion of the table presents the development in terms of number of claims reported over the years. The number of claims reported varies as more current information is obtained based on the data received from the ceding companies on the contracts underwritten. The lower part of the table shows the reconciliation of the figures to the book balances at the reporting date of these financial statements.
Underwriting year
2012 2013 2014 2015 2016 2017 Total
Claims reported
In underwriting year - 5.648 3.522 15.932 7.167 1.678 1.678
One year thereafter 500 17.874 45.343 35.912 23.455 - 23.455
Two years thereafter 1.706 32.160 77.113 48.753 - - 48.753
Three years thereafter 1.659 34.739 76.672 - - - 76.672
Four years thereafter 1.220 34.708 - - - - 34.708
Five years thereafter 1.244 - - - - - 1.244
As at 06/30/2017 1.244 34.708 76.672 48.753 23.455 1.678 186.510
Claims paid
In underwriting year - (391) (239) (125) (1.805) (243) (1.805)
One year thereafter (4) (6.437) (10.764) (11.748) (8.079) - (11.748)
Two years thereafter (582) (22.116) (30.677) (18.437) - - (30.677)
Three years thereafter (850) (26.187) (39.199) - - - (26.187)
Four years thereafter (1.067) (27.342) - - - - (1.067)
Five years thereafter (1.075) - - - - - (1.075)
As at 06/30/2017 (1.075) (27.342) (39.199) (18.437) (8.079) (243) (94.375)
Outstanding claims reserve (PSL) as at 06/30/2017 169 7.366 37.473 30.316 15.376 1.435 92.135
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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12.5.b. Table of progress of outstanding claims - Net of retrocession
Underwriting year
2012 2013 2014 2015 2016 2017 Total
Claims reported
In underwriting year - 4.379 2.451 4.939 3.002 1.445 1.445
One year thereafter 369 10.797 22.612 18.357 17.230 - 17.230
Two years thereafter 1.311 15.999 31.014 27.803 - - 27.803
Three years thereafter 1.281 16.336 31.421 - - - 31.421
Four years thereafter 821 16.001 - - - - 16.001
Five years thereafter 845 - - - - - 845
As at 06/30/2017 845 16.001 31.421 27.803 17.230 1.445 94.745
Claims paid
In underwriting year - (259) (148) (87) (1.090) (192) (192)
One year thereafter (2) (3.955) (6.057) (8.127) (5.808) - (5.808)
Two years thereafter (360) (10.515) (14.181) (13.062) - - (13.062)
Three years thereafter (537) (12.510) (18.065) - - - (18.065)
Four years thereafter (719) (12.997) - - - - (12.997)
Five years thereafter (722) - - - - - (722)
As at 06/30/2017 (722) (12.997) (18.065) (13.062) (5.808) (192) (50.846)
Outstanding claims reserve (PSL) as at 06/30/2017 123 3.004 13.356 14.741 11.422 1.253 43.899
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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13. Coverage of technical reserves The Company has technical reserves for investment fund quotas, government bonds and private securities amounting to R$ 89,261 which is an amount higher than the coverage needed, of R$ 71,253 computed accounting to CNSP Resolution No. 321/2015.
06/30/2017 12/31/2016 Technical Reserves 170.533 165.448 20% coverage of risk capital 5.497 5.188 Reinsurance assets (64.159) (74.703) Credit rights (40.617) (30.919) Amount to be guaranteed 71.253 65.014 Open-end investment fund shares 13.881 4.407 Government Securities 17.017 19.511 Non-Government Securities 58.363 56.876 Pledged of reserves 89.261 80.794
Sufficiency 18.008 15.780
14. Line of Business
14.1 Written Premium
Written premiums by the groups in the segment and their retention indices are as follows :
Written premium Ceded retrocession Retention (%)
06/30/2017 06/30/2016 06/30/2017 06/30/2016 06/30/2017 06/30/2016
Property 23.480 21.472 17.405 14.805 25,9 31,0
Special risks 1 162 (3) 182 420,9 (12,3)
Civil liability 2.961 2.015 1.172 1.095 60,4 45,6
Automobile 1.203 234 - 6 100,0 97,4
Transport 9.325 10.115 5.554 8.099 40,4 19,9
Financial risks 8.402 669 6.345 (454) 24,5 167,9
Life (127) 1.107 126 602 199,2 45,6
Homeowners 117 95 9 242 92,0 (157,7)
Crop 872 (157) 36 (464) 95,9 (195,5)
Other 9.599 2.994 769 13 92,0 99,5
Marine 770 1.521 371 - 51,9 100,0
Aviation 575 249 173 (18) 69,9 107,2
Total 57.178 40.476 31.957 24.108 44,1 40,4
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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14.2 Earned Premium
Earned premiums of groups in the segment and their claim and brokerage indices are as follows:
06/30/2017 06/30/2016
Line
Earned Premium
Loss ratio (%)
Brokerage (%)
Earned Premium
Loss ratio (%)
Brokerage (%)
Property 24.763 62,1 2,4 23.976 73,7 3,2 Special risks 74 (2.839,1) 5,0 381 144,1 4,0 Civil liability 2.673 (88,6) 3,3 2.592 65,0 3,3 Automobile 254 3,0 4,5 106 75,0 7,2 Transport 7.722 33,2 1,6 8.800 93,2 1,7 Financial risks 6.218 44,0 0,7 3.037 45,0 1,4 Life 430 93,0 5,2 969 60,0 1,0 Homeowners 110 159,3 - 90 35,0 - Crop 382 57,4 0,9 1.733 102,5 1,0 Other 6.515 99,6 3,7 1.748 163,2 8,2 Marine 1.568 (153,3) 10,8 1.556 124,8 9,2 Aviation 555 22,1 6,0 286 157,1 8,7
Total 51.264 41,4 2,6 45.274 82,1 3,1
15. Equity
15.1. Capital: Fully subscribed and paid-in capital is represented by 100,650,000 (one hundred million, six hundred fifty thousand) common registered no-par-value shares.
On February 4, 2016, Pama Holding Participações e Investimentos Ltda, subscribed in Terra Brasis Resseguros 200,000 common registered no-par-value shares, for R$ 272 (two hundred seventy-two thousand reais), as authorized by the Special Shareholders' Meeting held on that date, and approved by SUSEP on March 2, 2016
15.2. Capital reserve: These refer to cash contributions received by the Company, which do not flow through profit or loss as revenue, made by shareholders to bolster equity.
15.3. Legal reserve: This reserve is set up at the end of the fiscal year in accordance with Brazil’s Corporation Law, at 5% of each year’s net income and may reach up to a limit of 20% of the Company’s capital.
15.4. Dividends and interest on equity: Minimum mandatory dividends on adjusted annual net income are guaranteed to shareholders at the end of each year in accordance with Brazil’s Corporation Law.
The Executive Board's meeting held on November 15, 2016 approved distribution of interest on equity amounting to R$ 3,901, based on the net income for the year.
15.5. Subscription warrant: In 2012, the Company issued non-transferable subscription warrants on behalf of shareholder Pama Holding Participações e Investimentos Ltda., with maturity on December 21, 2017. These warrants entitle the holder to subscribe for 16,279.100 common registered no-par-value shares, for a subscription price of R$1.00, monetarily restated and adjusted in accordance with specified criteria. Pama exercised its subscription rights and subscribed for 450 thousand new shares in 2014 and 200 thousand new shares in 2016. At June 30, 2017, the subscription warrants issued but not yet exercised entitle the holder to additional subscription for 15,629,100 new shares.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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16. Risk management policy
Terra Brasis has an internal risk management system based on the integrated management of each one of the business processes, in conforming risk level to predefined objectives. The risk management process involves all of the Company’s organization levels, from senior management to the various business areas, identifying, treating and monitoring all risks.
16.1. Underwriting risk: This is defined as the likelihood of losses against the expectation associated to technical and actuarial bases for computation of premiums and technical provisions arising from the operations. To standardize and guarantee the quality of the risks assumed, Underwriting Guidelines were created for each business line. Compliance with the requirements contained in these guidelines is checked on an ongoing basis and changes are made when necessary.
Maximum risk retention, depending on business line was defined between 2.5% and 4.5% of Terra Brasis capital. Retrocession agreements were entered into for certain business lines, reducing the expected portfolio volatility.
Significant efforts are made to control possible accumulation. Particularly, Terra Brasis monitors, to the maximum extent possible, its exposure to any in-force coinsurance deals between ceding companies with which Terra Brasis has reinsurance contracts. For Surety Bonds, included as Financial Risks line, a control over accumulation by principal is in place.
16.2. Credit risk: Credit risk is defined as the risk that a counterparty will fail to honor a financial obligation to Terra Brasis. The Company’s internal investment policy provides directives on exposure to credit risk and compliance, which are monitored on a regular basis by the investment committee. Credit risks involving issuers of securities comprising the investment portfolio are controlled by the managers of the portfolio and of the investment funds. To mitigate retrocession receivables default risks, our retrocession pool is comprised of highly rated retrocessionaires. The table below represents the total of claims recoverable distributed by credit risk:
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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01/01/2017 to 06/30/2017 Local Admitted Occasional Total
Rating Amount % Amount % Amount % Amount % A+ - - 745 1,5 - - 745 1,5 A - - 44.650 88,8 2.306 4,6 46.956 93,4 A- - - - - 2.592 5,2 2.592 5,2
B++ 0,6 0,0 - - - - 0,6 0,0 0,6 0,0 45.395 90,3 4.898 9,8 50.294 100,0
01/01/2016 to 06/30/2016
Local Admitted Occasional Total Rating Amount % Amount % Amount % Amount %
A+ - - 1.461 5,8 - - 1.461 5,8 A - - 20.360 81,1 2,293 9,2 22.653 90,3 A- - - - - 989 3,9 989 3,9
B++ 12 0,0 - - - - - 0,0 12 0,0 21.821 86,9 3.282 13,1 25.103 100,0
Note: Classified according to A.M. Best ratings or otherwise to Standard & Poor’s, as applicable.
16.3. Liquidity Risk: Liquidity risk is defined as the risk of an entity facing difficulties in meeting its financial obligations within the maturity dates and in the amounts required. The Company manages liquidity risk by continuously monitoring expected cash flows and the combination of maturity profiles of financial assets and liabilities. At June 30, 2017, R$ 155,503, or 92.7% of the investment portfolio, was invested in assets redeemable within three days (D+3) and R$ 26,049, or 7.3% thereof, was invested in assets redeemable within 15 days.
Maturity of financial assets and liabilities is as follows:
Assets and liabilities No maturity Within 1
year
From 1 to 2
years
More than 2 years Total
Cash and banks 875 - - - 875
Financial assets at fair value through profit or loss 30.162 - - - 30.162
Financial assets available for sale 26.049 31.656 12.327 55.309 125.341 Receivables from insurance and reinsurance operations - 66.063 - - 66.063
Retrocession assets - 78.681 7.662 - 86.343
Total assets 57.086 176.400 19.989 55.309 308.784
Accounts payable - 9.100 - - 9.100
Debts from reinsurance operations - 28.986 - - 28.986
Technical Reserves - 158.023 12.510 - 170.533
Total liabilities - 196.109 12.510 - 208.619
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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16.4. Operational risk: It is the possibility of losses due to failure, deficiency or inadequacy of internal processes, personnel and systems, or due to fraud or external events, including the legal risk and excluding the risks arising from strategic decisions and the Company’s image. The Company has implemented adjustments to its structure, policies and operational procedures in line with the overall concepts published by CNSP and SUSEP in CNSP Resolution No. 238 and SUSEP Circular No. 517/2015.
16.5. Market risk: Market risk is defined as risk of financial losses resulting from changes in prices and financial market rates.
For investment portfolio assets, this risk is measured using the parametric consolidated VaR methodology, observing the portfolio history for one year and a reliability level of 97.5%. Estimated maximum daily losses and their corresponding percentage in relation to the investment portfolio are set out below.
Estimated maximum
Year daily loss Portfolio (%)
2017(*) 335 0,26 2016 353 0,27 2015 210 0,17 2014 159 0,16 2013 264 0,27
(*) Comprehending the period from January to June 2017.
To manage currency mismatching risk, Terra Brasis regularly reviews the balances of its foreign currency-denominated assets and liabilities and uses forex funds and future dollar contracts dealt at [B3] in order to minimize currency mismatch. At June 30, 2017, the Company was exposed predominantly to the US Dollar. Total assets and liabilities linked to that currency as well as the corresponding net exposure are stated below, in US dollars and their equivalent in reais.
Assets denominated in Liabilities denominated in Net US dollars US dollars exposure in US equivalent in US equivalent in US equivalent
Year dollars in reais dollars in reais dollars in reais
2017/06 15.254 50.465 13.472 44.568 1.782 5.897 2016/12 13.543 44.109 13.928 45.393 (385) (1.284) 2015/12 8.599 33.576 9.977 38.959 (1.378) (5.383) 2014/12 3.326 8.836 3.246 8.623 80 213
16.6. Sensitivity analysis: The objective of sensitivity analyses is to assess the impact on P&L arising from changes in actuarial and market assumptions.
A sensitivity analysis was conducted with the LAT (liabilities adequacy test) results and included measurement of impacts of changes in loss ratios on the test of technical reserve sufficiency, considering the financial flows of actual and estimated premiums. Such reserve sufficiency was not compromised. We present the variations related only to assessment and reference, since the changes in actuarial assumptions did not compromise the sufficiency of technical provisions. Certain results of the sensitivity analyses carried out in June 2017 and 2016 are as follows:
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
43
06/30/2017 06/30/2016
Effect gross of retrocession Impact
% of net income
% of adjusted
equity Impact % of net income
% of adjusted
equity
Loss ratio 10% higher (3.637) (195,0)% (3,4)% (3.270) (88,9)% (3,4)%
Loss ratio 10% lower 3.629 194,6% 3,4% 3.230 87,8% 3,4%
Effect net of retrocession Impact % of net income
% of adjusted
equity Impact % of net income
% of adjusted
equity
Loss ratio 10% higher (2.098) (112,5)% (1,9)% (1.896) (51,5)% (2,0)%
Loss ratio 10% lower (2.098) (112,5)% (1,9)% 1.857 50,5% 1,9%
A sensitivity analysis was conducted for the investment portfolio using stress calculations for closing positions at the reporting date. The test included changes in exchange rates, interest rates, shares, and inflation. The test assumptions and results are as follows:
Forward structure of IPCA curve: variation of 300 basis points or 3% on an equal basis in all of the forward curve vertices.
Bovespa index: 10% variation.
Foreign exchange: 10% variation.
Scenario A Scenario B
Risk Factors Shock
Impact on pre-tax income Shock
Impact on pre-tax income
Foreign exchange 10% 1.159 -10% (1.162) Shares (Ibovespa) -10% 6 10% (6)
Inflation 300 bps (269) -300 bps 390
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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17. Breakdown of P/L accounts
06/30/2017 06/30/2016 a. Premium: 1 Reinsurance accepted 59.155 44.372 2 Retrocession accepted (702) (109) 3 Reinsurance and retrocession accepted abroad 9.885 3.709 4 RVNE 1.449 (1.438) 5 Cedent Commission (12.609) (6.058) Total written premium 57.178 40.476 6 Change in reserves (5.914) 4.798
Total earned premium 51.264 45.274
b. Claims incurred: 1 Claims reported (30.288) (37.793) 2 Change in reserve for claims incurred but not reported (IBNR) 9.063 596
Total (21.225) (37.197)
c. Acquisition costs: 1 Recognition of acquisition costs (1.707) (1.269) 2 Change in acquisition costs 362 (161)
Total (1.345) (1.430)
d. Other operating income and expenses: 1 Other operating income (expenses) (639) (15)
Total (639) (15)
e. Income from retrocession operations 1 Retrocessions ceded (40.551) (27.841) 2 RVNE ceded (28) (1.330) 3 Commission received from retrocessionaires 8.622 2.726 4 Change in premium reserves 2.789 839 Total retrocession expenses (29.168) (25.606) 5 Claims reported recovered from retrocessionaires 5.235 23.124 6 Change in reserve for claims incurred but not reported (IBNR) (2.942) 273 7 Profit sharing - retrocession 48 - Total retrocession income 2.341 23.397
Total (26.827) (2.209)
f. Administrative expenses 1 Personnel expenses (5.174) (3.734) 2 Third-parties services (1.166) (1.139) 3 Occupancy and operation (841) (829) 4 Legal publications, publicity, and class entities (761) (475) 5 Other expenses (284) (212)
Total (8.226) (6.389)
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
45
17. Breakdown of P/L accounts (continuation)
06/30/2017
06/30/2016
g. Tax Expenses 1 Federal taxes (on retrocession and other operations) (597) (601) 2 State and local taxes (50) (43) 3 COFINS (128) (864) 4 PIS (21) (140) 5 SUSEP supervisory fees (250) (202) 6 Union dues (42) (35)
Total (1.088) (1.885)
h. Financial income (expenses) Income Unrestricted financial assets
1 Variable income securities 1.831 2.163 2 Non-Government fixed income securities 2.335 2.113 3 Government fixed income securities 20 67 4 FX investment fund shares - 215 5 Other investment fund shares 1.405 418 Restricted financial assets
6 Non-Government fixed income securities 2.776 3.244 7 Government fixed income securities 1.026 1.917 8 FX investment fund shares 738 466 9 Other investment fund shares 111 426 10 FX fluctuation 4.495 12.258 11 Windfall profits 293 73 Total income 15.030 23.360 Expenses: 12 Variable income securities (582) - 13 FX fluctuation (4.720) (10.389) 14 FX investment fund shares (337) (2.923) 15 Other investment fund shares (210) (320) 16 Windfall expenses (165) (175) Total expenses (6.014) (13.807)
Total 9.016 9.553
i. Equity 1 Equity pickup earnings 146 140
Total 146 140
j. Taxes and profit sharing 1 Income tax 487 (1.159)
2 Social contribution tax (CSLL) 381 (881) 3 Profit sharing (79) (123)
Total 789 (2.163)
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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18. Benefícios a empregados e administradores
18.1. Private Pension fund: Under the terms of the agreement, the Company makes monthly contributions to fund the plan as well as deposits (credits) into individual accounts set up for its employees in an amount corresponding to 100% of the base contribution made by each pension plan member. Members may voluntarily make Extraordinary Contributions that are not matched by the Sponsoring Employer. The Plan grants temporary monthly income to its beneficiaries. The contributions made over the year summed R$ 73 (R$ 78 in 2016).
19. Subsequent events
Third-parties shares that compose the company´s investment portfolio were entirely sold and a total profit before taxes effects of R$ 21.4 million was computed.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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Board of Directors Rodolfo Riechert - Chairman
André Schwartz - Vice-chairman Carlos Roberto De Zoppa
Luiz Chrysostomo De Oliveira Filho Paulo Eduardo de Freitas Botti
Pedro Duarte Guimarães
Executive Board Paulo Eduardo de Freitas Botti - CEO Beatriz Cabrera Americano Fernandes
Bernardo Nolasco Rocha Carlos Roberto De Zoppa Paulo Toshio Hayakawa
Rodrigo de Souza Lobo Botti
Accountant Eduardo Póvoa
CRC-1SP223513/O-6
Actuary Laércio dos Santos Vicente
MIBA-2.300
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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Summary of the Audit Committee Report Semester ended in June 30, 2017. The Board of Directors Terra Brasis Resseguros S.A. São Paulo - SP
The Audit Committee of Terra Brasis Resseguros S.A.(“Terra Brasis”), established under the regulations set forth by Brazil's National Council for Private Insurance (CNSP) and by Brazil's Private Insurance Supervisory Office (SUSEP), operates in accordance with the bylaws and its internal regulation approved by the Board of Directors. It falls to the Audit Committee to support the Board of Directors in its responsibility for ensuring the quality and integrity of financial statements, compliance with legal and regulatory requirements, the performance, independence and quality of the work of independent auditors and the internal audit, and the quality and effectiveness of internal controls and risk management systems.
In the semester ended June 30, 2017, the Committee developed its activities based on a work plan prepared in accordance with its internal regulations, which included: (i) interviews with senior management and managers; (ii) evaluation of the structure, operation and monitoring of the work of the areas responsible for preparing the financial statements, the internal control system, the risk management activities and the compliance function; (iii) evaluation of the planning and scope of work performed by the internal audit; (iv) evaluation of the scope, performance and independence of independent auditors; and (v) evaluation of the quality of the financial statements.
Terra Brasis Management is responsible for the preparation of the financial statements, in accordance with the accounting practices adopted in Brazil, applied to the entities supervised by SUSEP. It is also of its responsibility establishment of procedures to ensure the quality of the information and processes used in the preparation of financial statements, risk management of operations and the implementation and supervision of internal control and compliance activities.
Independent auditor is responsible for examining the financial statements and issuing a report on their adequacy in accordance with Brazilian auditing standards established by the Federal Accounting Council (CFC). The internal audit is responsible for assessing the effectiveness of internal controls and risk management and the processes that ensure adherence to the rules and procedures established by Management and to the legal and regulatory standards applicable to Terra Brasis activities.
The Committee acts through meetings and conducts analysis based on documents and information submitted to it, as well as other procedures it deems necessary. The Committee's assessments are based on information received from management, independent auditors, internal auditors, risk managers and internal controls and on their own analysis from direct observation.
Over the semester, the Committee held meetings with accounting and controlling areas, internal controls and compliance, risk management, independent auditors and internal auditors, among others.
Over the six-month period ended June 30, 2017 Management decided and conducted a process of substitution of internal audit services providers. The Committee monitored this process and supported the Administration in evaluating the technical capacity of the new providers and discussed the planning of their work, including the scope and procedures to be applied. The Committee also assessed the aspects of independence and level of reporting of internal audit in the structure of the Organization.
The Committee maintains regular channels of communication with the independent auditors. The planning of the independent audit of the financial statements for the six-month period ended June 30, 2017 was previously discussed with KPMG Auditores Independentes and, at the end of the work, the team in charge of the work presented its results and conclusions to the Audit Committee. The Committee also assesses the adherence of independent auditors to policies and standards that address the maintenance and monitoring of the objectivity and independence with which these activities are performed.
Terra Brasis Resseguros S.A. Interim Financial Statements as of June 30, 2017 and 2016
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The Committee evaluated the processes for preparing the financial statements and discussed with the Management and the independent auditors the relevant accounting practices used and the information disclosed.
The Committee held regular meetings with the Chief Executive Officer and other members of the Board of Directors of Terra Brasis and at those meetings had the opportunity to identify and present suggestions to Management for the improvement of internal controls and risk management.
The Committee was not aware of the occurrence of an event, complaint, noncompliance with regulations, absence of controls, act or omission on the part of Management or fraud that, due to its relevance, would endanger the continuity of Terra Brasis or the reliability of its financial statements .
Conclusions
The Audit Committee, considering its responsibilities and limitations inherent to the scope and extent of its performance, and taking into account the results of the independent audit of the financial statements, embodied in the unmodified report issued on this date by KPMG Auditores Independentes, recommends approval by the Board of Directors of the financial statements of Terra Brasis Resseguros SA for the six-month period ended June 30, 2017.
São Paulo, August 17, 2017.
Audit Committee Pedro Horowicz José Campos
José Rubens Alonso